After Adopting the “Fraud-on-the-Market” Presumption of Reliance, Australia is Poised to Become a Plaintiff-Friendly Venue

by Mintz Levin - Class Action Recovery For Mutual Funds

The United States is a popular location for securities class actions, due in large part to its reputation as a generally plaintiff-friendly system.  A key contributor to that reputation is the acceptance of the “fraud-on-the-market” presumption of reliance.  However, in the wake of a recent decision by the Supreme Court of New South Wales, Australia is poised to become another popular location for “fraud on the market” actions.

In In the Matter of HIH Insurance Ltd (In Liquidation) and others (“In re HIH”), the Court considered for the first time whether to apply a “fraud on the market” theory of recovery.  There, the plaintiffs were shareholders in HIH Insurance Limited (“HIH”), a publicly listed company that was in liquidation.  The plaintiffs had all purchased their shares between October 26, 198, and March 15, 2001, during which time HIH released several relevant documents: a prospectus, final results for FY 1999, interim results for FY 2000, and final results for FY 2000.  HIH admitted that the documents overstated its operating profit and net assets, rendering them misleading and deceptive.

While there was no question as to HIH’s wrongdoing, the issue was that the plaintiffs admitted that they had never seen any of the misleading documents.  Reasoning that the plaintiffs did not rely on HIH’s misrepresentations in purchasing their shares, HIH’s liquidators thus rejected the proofs of debt submitted by the plaintiffs, and an appeal of that decision followed.

On appeal, the plaintiffs argued that they suffered loss under a theory of indirect causation.  Essentially, their position was that HIH’s misrepresentations artificially inflated the market price of its shares by misleading those investors who did directly rely on the fiscal reports.  Thus, when the plaintiffs bought their shares at that inflated market price, they paid more than they otherwise would have absent HIH’s conduct.  HIH argued in response that there was no such cause of action for indirect causation under these circumstances in Australian law.  Previously, according to HIH, indirect causation only applied where a passive applicant was harmed when a third party was induced to act to the prejudice of the applicant.  Here, it argued, the “third party” was the market itself, and the plaintiffs actively sought and purchased the HIH shares.

After a thorough analysis of prior case law, the Court agreed with the plaintiffs and, in doing so, adopted a “fraud-on-the-market” theory in Australia.  The Court concluded that, while the plaintiffs admitted that they were not directly misled, the market as a whole was.  The Court reasoned that an investor is inherently induced to enter into an investment transaction on the terms under which it does by the state of the market.  The Court recognized that an investor should be able to “reasonably assume that the market reflects an informed appreciation of a company’s position and prospects, based on proper disclosure.”  If an investor opts to buy shares in a company at market value, without knowledge that the market value is wrong because of that company’s fraudulent actions, then direct reliance on the company’s actions need not be necessary.  The Court aptly summed up the situations as follows:

The chain of causation was: 1) HIH released overstated financial results to the market, 2) the market was deceived into a misapprehension that HIH was trading more profitably than it really was and had greater net assets than it really had, 3) HIH shares traded on the market at an inflated price, and 4) investors paid that inflated price to acquire their shares, and thereby suffered loss.  Thus, the contravening conduct materially contributed to that outcome.

The Court’s decision in In re HIH has obvious international implications.  Under the U.S. Supreme Court’s Basic v. Levinson decision and its progeny, including the recent Haliburton decision, in the United States the “fraud-on-the-market” theory leads to a rebuttable presumption of reliance.  Thus, if the HIH case were decided in the United States, presumably, the plaintiffs’ admission that they did not see the allegedly fraudulent statements could be enough to rebut the presumption.  The HIH decision indicates that Australia could be adopting a more plaintiff-friendly application to the “fraud-on-the-market” doctrine.  As a result, it is likely to see an influx in securities class action claims which would not have been permissible before this decision.  This influx, as well as decisions to come which could expand upon this decision, bear watching for any institutional investors purchasing securities from Australian issuers.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Mintz Levin - Class Action Recovery For Mutual Funds | Attorney Advertising

Written by:

Mintz Levin - Class Action Recovery For Mutual Funds

Mintz Levin - Class Action Recovery For Mutual Funds on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.